November 22, 2023
Close Ended Mutual Fund

Close Ended Mutual Fund

Close Ended Mutual Fund is a type of investment fund with a fixed number of units issued to investors. Unlike open-ended funds, Closed-End Mutual Funds don’t allow daily redemptions. Closed ended schemes can only be purchased during the NFO (new fund offer) period, and the units can only be redeemed once the scheme’s tenure (lock-in period) or NFO has passed. This structure is designed for long-term investments, with fund managers managing the assets in the hope of increasing the fund’s value over time.

What Is Close Ended Mutual Fund

A closed-ended fund is either an equity or debt fund where the fund house only gives out a set number of units when the fund first starts up. Investors cannot buy or sell units in a closed-ended fund after the NFO (New Fund Offer) period ends. These funds are released through an NFO and then traded on the market like stocks. They have a set maturity date. Although the fund’s Net Asset Value sets its real price, the traded price may be higher or lower than this value, depending on how many units are being bought and sold. In simple terms, a closed-end fund “closes” when the launch period is over and stays closed until it matures. When this happens, the fund manager has more freedom to follow the fund’s investment goals.

Close-ended Mutual Fund Examples

Let’s take a look at the simple example to understand this. Imagine a mutual fund called “ABC Equity Fund” that started in India in January 2020. This fund has a set end date in January 2025, meaning you can plan to invest your money for five years. The fund mainly puts money into well-known, stable companies and has grown at an average rate of 8% each year since it started. Unlike other types of mutual funds that let you buy or sell units at any time, this one works a bit differently. Once the initial units were sold in 2020, if you want to buy or sell, you have to do it on the stock market. This gives people a way to get their money back before the fund ends in 2025 if they want to.

Types Of Closed End Funds

There are four types of Closed End Funds, they are as follows:

  1. Equity Funds
  2. Bond Funds
  3. Hybrid Funds
  4. Sector-Specific Funds

Equity Funds: These funds primarily invest in stocks and aim for capital appreciation. They are suitable for investors with a higher risk tolerance.

Bond Funds: These are income-focused funds that invest in government and corporate bonds. They are ideal for conservative investors seeking regular income.

Hybrid Funds: These funds invest in a mix of equities and bonds, aiming to offer both capital appreciation and income. They are suitable for moderate-risk investors.

Sector-Specific Funds: These funds invest in specific sectors like technology, healthcare, or finance. They offer high-reward potential but come with sector-specific risks.

Advantages Of Close Ended Mutual Funds

The most significant advantage of close-ended mutual funds is the potential for higher returns compared to open-ended funds. More such advantages are discussed below:

  • Fixed Maturity: The set maturity date allows fund managers to make long-term investment decisions without worrying about sudden redemptions, thereby potentially increasing returns.
  • Diverse Portfolio: Close-ended funds often offer a diversified portfolio that includes a mix of asset classes like equities, bonds, and other securities, providing a balanced risk-reward profile.
  • Less Cash Drag: Unlike open-ended funds, which need to maintain cash reserves for redemptions, close-ended funds can fully invest their corpus, reducing cash drag and potentially enhancing returns.
  • Trade at Discount: These funds often trade at a discount to their Net Asset Value (NAV) on the stock exchange, offering an attractive entry point for new investors.
  • Tax Benefits: Certain close-ended funds, particularly those that invest in government securities, may offer tax benefits, making them a more attractive investment option.

Disadvantages Of Closed End Funds

The main disadvantage of closed end funds is the lack of liquidity, meaning you can’t easily withdraw your money whenever you want. Here are some more disadvantages:

  • Limited Flexibility: Once you invest, your money is locked in until the fund matures. This can be a problem if you need quick access to cash.
  • Market Risk: Like any investment, closed-end funds are subject to market risks. If the market performs poorly, so will your investment.

Difference Between Open Ended And Close Ended Mutual Fund

The key difference between open ended and close ended mutual fund is that in open-ended funds, you can redeem your investment anytime, but in closed-end funds, your money is locked until maturity. Here’s a table to explain further:

ParameterOpen-Ended FundsClosed-End Funds
LiquidityHigh liquidity allows investors to redeem their units at any time, offering financial flexibility.Liquidity is limited as the fund has a fixed maturity date, locking in investments until that time.
Management FeesGenerally have lower management fees due to a simpler structure and frequent redemptions.Often come with higher management fees as they employ more complex strategies and have fixed terms.
Investment StrategyFocus on short-term gains as they need to maintain liquidity for frequent redemptions by investors.Can afford a long-term investment strategy due to a fixed maturity, potentially leading to higher gains.
TradingNot traded on stock exchanges, units are bought and sold at the Net Asset Value (NAV) from the fund itself.Traded on stock exchanges like individual stocks, allowing for market-driven pricing.
RiskGenerally lower risk due to the ability to redeem quickly and a more conservative investment strategy.Risk can be higher due to long-term investment strategies and the inability to exit before maturity.

How To Invest In Closed End Funds?

Investing in closed-end funds involves a few key steps. Start by researching various funds to find one that aligns with your financial goals. Once you’ve chosen a suitable fund, you can invest either during its NFO or buy units later on the stock exchange. Platforms like Alice Blue can simplify this process for you. Here are the steps:

  • Research: The first step is to conduct thorough research on the various closed-end funds available in the market. Look for funds that have a solid track record and align with your investment objectives.
  • Choose a Fund: After your research and consultation, select a fund that best suits your financial goals and risk tolerance. Make sure to read the fund’s prospectus and understand its investment strategy.
  • Invest: Once you’ve made your choice, the next step is to invest. You can either invest during the NFO or purchase units later on the stock exchange. Investing can be made easier through the use of platforms like Alice Blue.

It is important to consult a financial advisor if you’re new to investing or unsure about your choices.

Best Close Ended Mutual Fund

Here is the list to some of the best close ended mutual funds:

Fund NameFund HouseFund Category1 Year Return3 Year Return5 Year Return
HDFC Top 100 FundHDFC Mutual FundLarge Cap Equity21.85%26.78%15.18%
Kotak Emerging Equity SchemeKotak Mahindra Mutual FundLarge & Mid Cap Equity20.43%31.73%23.15%
Axis Long Term Equity FundAxis Mutual FundLarge Cap Equity8.62%16.22%13.86%
SBI Equity Hybrid FundSBI Mutual FundEquity Hybrid10.23%17.88%14.15%
ICICI Prudential Value Discovery FundICICI Prudential Mutual FundLarge Cap Equity24.78%30.83%18.32%

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What Is Close Ended Mutual Fund  – Quick Summary

  • Close Ended Mutual Funds have a fixed corpus and maturity date.They offer the potential for higher returns but come with certain disadvantages like limited liquidity.
  • They differ from open-ended funds mainly in terms of liquidity and investment strategy.
  • There are four types of Closed End Funds, they are as follows: Equity Funds, Bond Funds, Hybrid Funds and Sector-Specific Funds.
  • Close-ended mutual funds have the potential for higher returns than open-ended funds, which is their main advantage.
  • Since you can not easily withdraw your money whenever you want, closed end funds’ main drawback is their lack of liquidity. 
  • Some of the top performing close ended mutual funds are Kotak Emerging Equity Scheme, ICICI Prudential Value Discovery Fund, HDFC Top 100 Fund, etc.
  • Investment in mutual funds for free with platforms like Alice Blue offering a convenient way to invest.

Close Ended Mutual Fund   – FAQs  

What Is a Close Ended Mutual Fund?

A close-ended mutual fund is a type of investment fund that has a fixed number of units and a specific maturity date. You can’t redeem your units whenever you want, unlike in open-ended funds.

What is the difference between open and closed ended mutual funds?

The main difference between open and closed-ended mutual funds is liquidity. Open-ended funds allow you to redeem your units at any time, while closed-ended funds have a fixed maturity date.

Which are close ended mutual funds in India?

Some of the best close ended mutual funds in India are as follows:

  • HDFC Top 100 Fund
  • Kotak Emerging Equity Scheme
  • Axis Long Term Equity Fund

What are the benefits of a close ended mutual fund?

One of the main benefits of a close-ended mutual fund is the potential for higher returns due to a more stable, long-term investment strategy.

Are close ended funds risky?

Closed-end funds can be riskier than open-ended funds due to their long-term investment focus and the inability to redeem units at will.

Who buys closed-end funds?

Investors looking for potentially higher returns and who are comfortable with a fixed investment horizon typically buy closed-end funds.

Why is it called a closed-end fund?

It’s called a closed-end fund because it has a fixed number of units and does not continually issue or redeem units like an open-ended fund.

Is it good to invest in a closed-end mutual fund?

Investing in closed-end funds can be beneficial for those who have a long-term investment horizon and are looking for potentially higher returns.

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